Financial System and Auditing
Published on Jun 13, 2020
The Simulated Situation
You are employed as an audit senior by a firm of accountants and
registered auditors. You are helping with the audit of Haxted Restaurant Ltd, a
private company which owns a large seaside restaurant complex in the South East
of Scotland. The year end is 30 September 2019.
Haxted Restaurant Ltd is a private limited company which owns a
large restaurant plus a cafe and takeaway. The owners of the company are Mark
and Anna who are husband and wife and have run the business together for 10
years. They have 50% of the share capital each and they are both directors of
Mark is responsible for the financial side of the business and is
'front of house', whereas Anna is more involved with the day to day operational
matters of the business. However, they have recently taken on two managers who
are allowing Mark and Anna to spend less time in the restaurant.
The trade is very seasonal with high turnover and profits in the
summer months. However, the restaurant remains open for the whole year and
benefits from weekend visitors and Christmas holidaymakers. It also has an
increasing local clientele.
During the summer months a large number of casual workers are taken
on. Some workers only last a few days and do not return. Many are at school,
college or university and are taking a holiday job. During the rest of the year
there are around 15 people on the payroll. Most of these have been there for at
least two years and this part of the workforce is fairly stable.
Many of the sales are cash sales, particularly in the cafe and
takeaway. Purchases are bought on credit from a number of different suppliers.
The company owns the premises from which the business is run.
Monthly accounts and payroll
The company employs a bookkeeper for a few hours a month to prepare
monthly accounts and the payroll. Both are prepared using Sage software. There
is no password protection over the software.
The computer is kept in the office at the back of the restaurant.
This office is also used as a rest room for staff.
Customers can pay by cash, cheque, or credit card. There is an
automatic link for credit card payments. So, the amount is transferred directly
into the company's bank account.
A large amount of sales is paid for in cash.
At the end of each day the tills are totaled and the money in each
till is counted by one of the new managers. Sales are recorded on a daily
takings sheet. A comparison is made between the amount in the tills and the
amount shown on the till rolls. Although differences are noted there is little
or no follow up unless there is a large difference.
On most days money from the tills is used to pay for small items.
Receipts for these items are sometimes attached to the daily sheet but there is
no real discipline over this.
The cheques are paid into the bank on the following day and cash is
kept in a safe in the office and used to pay for purchases and wages as much as
Food orders are made by the head chef. He is also responsible for
checking deliveries to ensure that the items are in good condition and that the
delivery matches the order. He signs the delivery notes as evidence that he has
Mark pays the invoices in the month following the date of the
invoice. He matches the invoices to the statements received and clips them
together. He notes the amount paid on the statement and states whether the
payment was made by cash or cheque, giving the cheque number as appropriate.
The creditors at any one time are therefore usually one month's
worth of purchases and expenses.
Wages are paid on a fortnightly basis and are calculated from the
hour sheets which the staff completes for themselves. Payments are made in cash
when possible. The bookkeeper uses Sage payroll to calculate the wages but has
problems in obtaining P45s, P46s, addresses, NI numbers, and dates of birth etc.
for the casual staff in the summer months.
Once the bookkeeper has calculated the wages, she counts out the
cash and puts it in envelopes for the staff.
These are purchased by Mark and Anna as required. The bookkeeper is
not reliable at posting them to the correct account and is more likely to post
fixed assets to the repairs and renewals account.
The tasks that your manager would like you to complete are set out as following:
You are planning the audit and considering which audit areas to
concentrate on. Read the background information of this simulated case study.
· State audit areas
which appear to have high inherent risk.
· For each area you
have stated, explain the factors which lead to the high inherent risk.
· Assess the risk
of fraud within this business and discuss how you could identify them
Note: consider inherent risk only - do not refer to the accounting
systems at this stage.
You have been asked to prepare the audit program for sales. The
audit objectives are to ensure that all sales are recorded and that sales have
been recorded accurately.
i) Explain the following in respect to the case above:
· the tests of control
· the transactions
· the analytical procedures
They may be performed to achieve the objectives.
ii) You are considering the samples to be tested for
various areas of the audit.
a) When testing any balance sheet item or profit and
loss account item for understatement, state the type of population that the
sample should be drawn from. Illustrate your answer by stating the population
that a sample should be drawn from when testing purchases for understatement.
b) State three factors you would consider in
determining any sample size, with reference to scope and materiality.
i) Your junior has prepared a schedule of the items
included in the repairs and renewals account which he thinks may be non-current
assets. It is the company's policy to capitalize amounts over £100
Set out what additional audit tests you would perform to confirm
that fixed assets are complete and accurate and that they exist and reassure
ii) Mark has been talking to you about his plans for his
business. He is keen to expand and is considering buying another restaurant a
little further along the coast which is also a client of yours. Mark has asked
your opinion on whether the other restaurant would be a good buy.
From the audit of the other restaurant you know that it is
struggling to attract business, and that it is at risk from a land slip. Based
on this inside information you think it may be unwise for Mark to buy it.
Set out how you would deal with this situation.
You have completed the audit and it has been agreed that the audit
report should give an unqualified opinion. Your junior cannot understand how
you can do this when you have not checked all of the company's records.
(i) With reference to the wording in the `Basis of
Opinion' section of the audit report, explain the assurance that is given by an
audit report, and why we do not
have to check everything in order to give an unqualified report.
(ii) Set out your explanation which you may stipulate in
a management letter in relation to a statutory audit of Haxted Restaurant Ltd.